U.S. economy grew 2.8% in third quarter

Boost from surprisingly large inventory buildup could prove short-lived

WASHINGTON (MarketWatch) — The U.S. economy matched its fastest pace of growth in a year in the third quarter, but the pickup was aided by a surprisingly large buildup in business inventories that could prove fleeting.

Consumer spending, the main engine of the U.S. economy, softened slightly in the June-to-September period, suggesting the U.S. entered the final quarter of 2013 with little momentum.

Gross domestic product rose at an annual rate of 2.8% in the third quarter, up from 2.5% in the prior period, the Commerce Department said Thursday. Economists polled by MarketWatch had forecast a 2.3% increase.

The level of activity in the third quarter, though somewhat faster, still shows an economy growing at a painfully slow clip compared to prior recoveries. The U.S. has been expanding around 2% in the past few years and has been unable to generate enough thrust to break out of its low-growth orbit.

Growth is forecast to tally around 2% in the fourth quarter, held down in part by the government shutdown in October. And some firms such as Goldman Sachs peg GDP as low as 1.5% in the October-to-December period.

The budget battle dampened the confidence of consumers and spurred many businesses to postpone hiring and spending plans. It’s also made it harder to figure out where the economy is headed.

Faster growth is unlikely until early to mid 2014, economists say.

As usual consumers accounted for the biggest chunk of growth. Consumer spending rose 1.5%, but that was less than the 1.8% rate in the second quarter.

The underlying strength of demand for U.S.-made goods and services, however, was somewhat better. So-called real final sales, which omit unsold goods, rose at 2% annual pace, little changed from 2.1% in the prior quarter.

Bloomberg

Bottles of liquid detergent are filled as they move along a production line at the S & S Soap Co. manufacturing facility in the Bronx borough of New York, U.S., on Monday, Nov. 4, 2013.

In the business world, companies reduced investment in things like software, buildings and equipment. The increase in fixed investment slowed to 4.1% from 6.5%.

Yet the housing sector maintained its breakneck pace of the past few years. Spending and investment on new homes climbed 14.6%, up from 14.2% in the second quarter and 12.5% in the first three months of 2013.

Companies stockpiled more goods in the third quarter, but whether that’s because the shutdown hurt sales or they were preparing for the holiday shopping season is unclear.

The value of inventories rose by $86 billion in the third quarter to mark the biggest increase in a year and a half. Farm inventories posted the biggest increase since 1996, reflecting efforts by farmers to rebuild stockpiles that were sharply drawn down last year by a severe drought.

If companies restock in the fourth quarter at a much slower rate, that would act as a big drag on GDP, economists say.

The trade picture also improved in the third quarter. Exports rose by a preliminary 4.5% vs. a 1.9% increase in imports. Higher net exports are a positive for GDP since it means Americans are buying fewer foreign goods and services and instead buying more produced at home.

Federal government expenditures, meanwhile, fell by a 1.7% annual rate to mark the fourth decline in a row. The drop in spending largely reflects cutbacks in the federal government required by the so-called sequester law that took effect in March.

State and local spending, however, rose sharply to more than offset the reduction in federal outlays. Total government expenditures actually rose 0.2% after falling in the prior three quarters

Inflation as measured by the PCE index, rose sharply compared to the second quarter but remained quite low. The index climbed to an annual rate of 1.9% from a decline of 0.1% in the second quarter.. The core rate that excludes food and energy advanced at a 1.4% clip.

Low inflation has enabled the Federal Reserve to maintain a massive economic-stimulus program that entails keeping interest rates low for consumers and businesses.

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